Tuesday, August 05, 2008

There's been a lot of talk recently about offshore drilling, and from what I've seen, most discussions in the media shed more heat than light. Both sides have their talking points, polls are commissioned, and soon we'll all move on.

The issue, however, is apparently very poorly understood by the media talking heads. As with so many important issues, the pundits are interested only in how things "play," and not in the underlying details of the debate. That's where we come in. In the Drexel spirit of education I humbly submit this brief primer on the debate regarding offshore drilling.

First, you should understand that the United States claimed for ourselves all coastal land within 200 miles of our coasts (and assorted terrotories) under President Reagan's proclamation 5030, establishing the U.S. Exclusive Economic Zone (EEZ) (which is apparently unknown to the terminally stupid Rep. Jean Schmidt, R-OH2). This area includes the outer continental shelf (OCS), and in 1990 President Bush issued a presidential directive placing a moratorium lasting until 2000 on all unleased area offshore of Northern and Central California, Washington, Oregon, the North Atlantic coast, and the Gulf of Mexico east of Mississippi. In 1998, President Clinton extended this moratorium through 2012. (As an aside, when we talk about leasing, it's because the federal government and the states own the rights to the resources offshore, and in order to drill oil companies must lease the land from the government, paying them royalties.)

So how much oil is offshore anyway?

This table, from the 2000 MMS study of offshore resources, documents the available offshore resources that are undiscovered but technically recoverable. Notice that the total amount of oil (mean case) is about 86 billion barrels of oil (bbo). Not including Alaska, there are about 60 bbo, the vast majority of which is in the Gulf of Mexico. I outlined in red the relevant mean estimate of how many billion barrels of oil are undiscovered but technically recoverable in each region.

I know it's hard to read the numbers, but here's the gist, in table form (from the 2000 MMS study, revised 01/2007). Although the moratorium covers roughly 85% of the area, it includes only about 30% of the oil (18 bbo out of 59 bbo).

It's also important to notice that the bulk (~10 bbo) of those ~18 bbo are off the coasts off California, where the local politics make additional drilling unlikely. There is bipartisan opposition in California against leasing more land for drilling.

Florida also has bipartisan opposition to drilling, which impacts both the eastern Gulf of Mexico and the South Atlantic regions. Both Florida and California are reluctant to allow more drilling offshore because their beaches and maritime communities are large and important parts of their economies. 10,000 barrales of oil washing up on Miami after a hurricane would have a rather detrimental impact on tourism, I imagine.

We are effectively talking about offering up for leasing less than 7 bbo of offshore oil, much of which is in deeper or rougher waters than currently exploited resources (ie off North Atlantic coasts). Also, these oil fields are typically much smaller than those in the Gulf of Mexico currently being exploited, and those in off of California, which means more drilling per barrel. This means more expensive extraction, and a smaller energy return on investment (EROI).

An additional piece of this puzzle is that there are significant discovered offshore resources available for drilling that are being leased and aren't being drilled. In fact, only 10.5 million of the 44 million acres being leased are currently being drilled.

Clearly, the idea that lifting the federal moratorim on offshore drilling will bring salvation from high energy prices is a mirage.

I have heard some interesting discussion regarding the political debate, however. I have basically heard two prominent schools of thought from energy experts on this issue:

Let them drill. Lift the moratoriums, hopefully in a political exchange for more incentives for renewables or a cap-and-trade program (This seems to be Obama's direction). The idea is that it won't have any impact, except to the oil companies' bottom lines (and a few unfortunate ecosystems), but that it removes the mirage from the debate. That is to say, people won't embrace renewables as long as they believe they can still drill their way out of it.

Don't cave to ignorant public pressure. Lifting the moratorium has not insignificant reprocussions for coastal ecology, and won't do a thing to really lower energy prices. Furthermore, acquiesing only further enables thebelief that we can drill our way out of it.

I think that both sides have merit, but I note that both sides agree on the futility of expanding offshore drilling. The only people who will tell you that more drilling will lower prices are Republican politicians. In fact, even Bush's Department of Energy concludes that, and I quote

"The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. Total domestic production of crude oil from 2012 through 2030 in the OCS access case is projected to be 1.6 percent higher than in the reference case, and 3 percent higher in 2030 alone, at 5.6 million barrels per day. For the lower 48 OCS, annual crude oil production in 2030 is projected to be 7 percent higher—2.4 million barrels per day in the OCS access case compared with 2.2 million barrels per day in the reference case (Figure 20). Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant."

Emphasis mine. Here is the EIA projection of oil production with and without drilling in the currently unleased OCS areas.

That difference between the green line and the blue line is just about the entirety of John McCain's energy plan (an remember, Florida and California, which make up more than 60% of that difference, won't allow drilling anytime soon.)

Long story short, if they started today, five years from now we would be pumping 1% of our current daily consumption, and that would rise to a maximum of 5% by 2020-2030. This would be a trivial amount of new supply on the global markets, which are sure to be much larger 20 years from now.